c19d-lr - 19.d Evaluating Investments We can evaluate...

19.d Evaluating Investments We can evaluate whether or not an investment is worthwhile, or determine which investment is most beneficial when selecting among mutually exclusive investments by using the formula for the present value of an annuity: PV=B/(1+R)+B/(1+R)^2+B/(1+R)^3+……B/(1+R)^N B= The amount of the payment received each year R= The rate of interest on the payment received in that particular year N= The number of years that will elapse before that payment is received-$50 +$30 +$30 N=0 N=1 N=2 N=3 Figure 19.d.1-$100 +$40 +$40 +$40 N=0 N=1 N=2 N=3 Figure 19.d.2 Figure 19.d.1 and 19.d.2 are graphical illustrations of the present value of an annuity. The negative dollar amount in the period N=0 represents the initial payment that is invested, $50 in figure 19.d.1 and $100 in figure 19.d.2. The positive dollar values in the following periods, N=1, N=2, and N=3 represent the return we will receive on our investment expressed in the future value of dollars. The initial investment in N=0 is

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